On August 7, the Bank of England reduced its key rate by 0.25% to 4%. This decision was taken by a narrow majority, with four of the nine members of the monetary committee voting for the status quo.
It is true that at 3.6% in June, inflation remains well above the 2% target. It is even expected to rebound to 4% in September according to the Bank of England's forecasts.
But for the five members who voted for the reduction in the cost of money, the easing of inflationary pressures in recent months and the moderation of wage increases validate the scenario of a medium-term return of inflation to the 2% target. It was therefore possible to lower the key rate to support depressed economic activity in the 2nd quarter.
It will take more than monetary easing to revive the British economy. At 4%, the key rate in the United Kingdom is twice as high as that of the Eurozone (2.15%). But the Bank of England's room for manoeuvre is limited.
Only rate cutting is not enough
Since Brexit, inflationary pressures have become persistently higher. The new border procedures have increased the price of imports. The tightening of migration policy has exacerbated the labour shortage and consequently led to higher wages, which are reflected in prices, particularly in services.
Ultimately, the cut in the key rate does not change the (weak) economic outlook for the United Kingdom and therefore has not had an impact on the financial markets. The London Stock Exchange fell slightly on August 7 while the pound remained relatively stable on the foreign exchange market.
It should be noted that despite higher key rates, the British currency has depreciated significantly against the euro since the beginning of the year because it is penalised by the UK's economic, financial and political difficulties. We don't advise buying UK stocks. See our recommendations here.